Egypt's president urges confidence in banks as pound slips further against the dollar

Egyptian Prime Minister Hesham Kandil talks during a press conference in Cairo, Egypt, Sunday, Dec. 30, 2012. Kandil says his country will resume talks in January with the International Monetary Fund over a $4.8 billion loan, after they were suspended during this month's political turmoil over the now-adopted constitution. (AP Photo/Amr Nabil) (The Associated Press)

CAIRO – The Egyptian pound slipped further against the dollar on Monday, a downward plunge on the first two days of trading under a new system, as the president tried to assure a worried public that the crisis atmosphere will end soon.

The pound slid nearly 1 percent on Monday from the previous day, bringing the exchange rate at banks to 6.42 pounds to the dollar. It marked a cumulative loss of nearly 4 percent this week, after Egypt's central bank took steps in what bankers believe is an attempt to control the devaluation of the currency.

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In an effort to instill confidence among people who have been rushing to sell Egyptian pounds for dollars, President Mohammed Morsi said the pound's fall "does not worry or scare us, and matters will balance out within a matter of days."

His remarks to Arab journalists, carried by the official news agency MENA, come as Egypt grapples with a crippling deficit that the planning minister said Monday is likely to reach 200 billion Egyptian pounds ($31.5 billion) by mid-2013.

Monday's slide of the Egyptian pound came on the second day of trading under a new dollar auction system aimed at regulating the devaluation.

The Central Bank of Egypt sold $75 million on Monday for the second straight day under the new system, according to state news media.

Under the auction, banks bid for dollars and know how much the central bank is selling that day. In the past, the banks used to buy through two private intermediary banks, according to a banker familiar with the trades.

He said that not all of the banks that submitted requests to trade were approved. Banks that joined the auction received just 66 percent of what they were bidding on, he said, speaking on condition of anonymity because he was not authorized to speak to reporters — indicating continued pressure on the pound.

The bank appears to be trying to avert a sharp devaluation of the Egyptian currency in a nation where half of its 85 million people live just at or below the poverty line of $2 per person a day.

Foreign reserves have fallen to around $15 billion from $36 billion in January 2011, before the uprising that toppled Hosni Mubarak and the political turmoil that followed, which battered key foreign currency earners such as tourism and foreign investment.

To boost investor confidence and the country's foreign reserves, Egypt is negotiating a series of large loans.

Egypt has requested a $4.8 billion loan from the International Monetary Fund. The loan has been delayed because of political turmoil over Egypt's new constitution, approved in a referendum this month.

Egypt is also in talks for a $900 million loan from the European Union, $500 million from the African Development Bank and $450 million from the United States. It has already received transfers from Qatar that have propped up its reserves and is expecting another $2 billion from the oil-rich Gulf country. It is finalizing talks for $1 billion from Turkey, according to Planning Minister Ashraf el-Arabi.

Economists estimate that the Egyptian pound is overvalued. They believe the current devaluation and planned austerity measures to cut subsidies and raise taxes are part of a package of conditions put forth by the IMF. Neither party has confirmed the contents of the proposed deal.

Now that the new constitution has been approved, the government has again turned its attention to economic reforms that are likely to include wide-ranging tax hikes.

An IMF official told The Associated Press in an email that they are in "continuous contact" with Egyptian authorities and "look forward to learn about the status of the government's economic program." The official spoke on condition of anonymity in line with the organization's regulations.